Seven charts explaining the global economic environment today

JP Morgan hosted a series of roadshows this month, presenting its quarterly “Guide to the markets”. The overwhelming message was that the company is more cautious today than at the start of the year and that now is not the time to be taking big bets …

Here’s what Max McKechnie, global market strategist, had to say, starting with the US:

The first three months of 2023 were characterised by remarkable economic resilience.

“The US economy was supported by pent up savings,” said Max. “Americans had about $2.5 trillion excess savings in the bank – a lot of which they have been happy to spend – and there is still $1trillion left. It will continue to support the consumer this year but will eventually run out.”

Tighter credit conditions now pose a risk, however. “Banks are tightening lending standards and when that happens, we usually get a recession,” Max continued. “This is what will cause the US economy to slow.”

While smaller US banks have come under pressure in recent months, Max is more confident about the outlook for larger banks. “The amount of rainy day money they had to put aside is a lot larger today than in 2008,” he said.

Europe, on the other hand, has been boosted by a sharp fall in energy prices. “No one is worried about gas shortages next winter,” said Max. “Also, in some parts of Europe, energy bills are pre-paid, so some people are even getting money back from the utilities companies right now.” As a result, the European consumer is more confident about spending too.

Max is particularly worried about the “unfortunate” UK, however. “Interest rates will start to bite this year,” he said. “Our mortgage stock is much shorter than the US and we’ve really only got a five-year window of not worrying about the Bank of England.”

This is shown clearly by the chart on the right hand side below. While fixed rate mortgages have softened the blow of rising interest rates for the last 18 months or so, by the end of 2024, 60% of the mortgage market will be paying higher rates. “People will have to cut back on spending then,” Max said.

While Max is pretty certain inflation has peaked in the US – where house prices have softened dramatically and there are signs of cooling in the labour market – he’s less confident about the UK where wages are still increasing and the public sector is confident enough to strike. “The way we calculate energy prices also means they will not fall as quickly as they have done in the US and Europe,” he said. If inflation is peaking in the US, interest rate peaks  should follow.

So, what should investors do in this environment?

“Have a balanced portfolio,” says Max. “You need balance between stocks and bonds, balance between equity regions and balance between equity styles.”

“The last cycle was all about the US, but the US stock market is priced to perfection in my view,” he explained. And taking a look at how the US stock market has performed in the past few years, it’s been quite a roller coaster ride as you can see on the chart below.

The UK, emerging markets and also China look better value in Max’s view. Within China, Max believes investors need to be selective, however, as the Chinese consumer has been much less confident than Western consumers after the reopening.

Above all, Max says that quality matters in recessions. “You need to invest in companies with consistent earnings, strong balance sheets and good management,” he concluded. “We need a return to old school due diligence.”

_{Photo by Waldemar on Unsplash}